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John Bell from Clarke Bell advises on what you can do if you are a contractor struggling to repay a loan taken out during the pandemic who is facing insolvency.
Contractors have had to face a lot of challenges in the last year or so, including Brexit, Covid and the Off-Payroll legislation (IR35). A lot of contractors have seen a reduction in their business, and, in some cases, they have seen no work at all as contracts have been put on hold while hiring firms wrangle with their own issues caused by these challenges.
Those contractors who have been fortunate enough to secure contracts may now be facing late payments which, for a one-man band, can put a significant strain on a limited company’s bank account and cashflow. The Government’s initiatives did little to help limited company contractors. So, many were forced to take on one of the government-backed loans, through the Coronavirus Business Interruption Loan Scheme (CBILS) or Bounce Back Loan Scheme in order to help support their company during the pandemic.
The loans have certainly helped those businesses which were doing well before Coronavirus hit. Since May, repayments of those loans have been due. Some contractors are now struggling to repay their loan and, with no work or money coming in, many are facing insolvency.
For those limited company contractors finding themselves in that situation, John Bell, director and founder of licensed insolvency practitioners Clarke Bell, outlines why a Creditors’ Voluntary Liquidation (CVL) is often the best course of action to deal with a company’s debts and fulfil the legal obligations of the company directors.
There are several benefits for company directors and their creditors in using a CVL:
it means directors have some control over their situation, and can act before things get any worse for their business
as it is a voluntary process, directors are free to choose which Insolvency Practitioner they appoint to carry out the CVL (as opposed to a compulsory liquidation)
the director can close their company and has the option to open another business in the future
the directors can avoid their company being forced into compulsory liquidation – which is the most serious type of liquidation.
First and foremost, a company director should contact a licensed insolvency practitioner for some expert advice. Most insolvency practitioners will offer you free and confidential advice to see what your best option is.
A CVL is the most frequently used corporate insolvency solution, but the insolvency practitioner will tell you if there is a better option for your particular situation.
A common scenario is that contractors have an Overdrawn Directors Loan Account – i.e. money they have borrowed from the company. This is money that needs to be repaid to the company. An insolvency practitioner will work with the company’s accountant (where applicable) to work out an affordable re-payment schedule and ensure the director’s obligations are fulfilled. The re-payment schedule will be based on a means test or ability to pay, coupled with a ‘Time To Pay Arrangement’.
Reaching a settlement like this is preferable to the alternative – which is bankruptcy, and would most likely lead to a nil recovery for creditors.
Another common scenario at the moment is when a contractor has taken out a Bounce Back Loan (BBL) and has spent part of it on living / household expenses, instead of just using it for their business (for which it is intended). This also needs to be repaid.
In some cases, the director can make a redundancy claim to help pay back their BBL, and monthly repayments for the balance.
When a CVL is the right solution, the insolvency practitioner will work with the company director and their accountant to collect all the necessary information to proceed with the liquidation – including a full list of creditors and company accounts. As soon as the CVL process starts, the company will need to stop trading.
An insolvency practitioner will lead their client through the process step by step – including all the necessary paperwork.
Doing nothing is not an option when facing financial difficulties and a company director has a legal duty to do something about their insolvent company.
The sooner professional advice is sought, the more options there are available.
A lot of company directors / contractors say that they wish they had spoken to an Insolvency Practitioner a lot sooner than they did. Had they done so, they would not have put ‘good money after bad’ and they would have avoided months of unnecessary stress and sleepless nights.
*John Bell is Director of licensed Insolvency Practitioners Clarke Bell, which he founded in 1994 and is based in Manchester.